Steering clear of the herd mentality

Commentary: Charting a different investing course can make all the difference

By

KevinKerr

NEW YORK (MarketWatch) -- The old adage "sell in May and go away" is one of those sayings you learn as an investor right from the beginning and are supposed to use as a rule of thumb.

The investing world is filled with such slogans -- "buy the rumor, sell the news" or "if a market is worth buying, it's worth buying at the market," to name two more. All are catchy and have a long history, but that doesn't always mean they're the best strategies in today's market.

The last year has impacted almost every investor, and few sectors have been spared. Whether it be real estate, commodities, stocks or currencies, investors have been through the ringer.

Now, just as the global economy is showing glimmers of hope with slight rises in consumer confidence and spending, what happens?

The markets have been choppy to say the least, and many sectors have been beaten down for little reason. Credit and liquidity are tight, and investors are scared and cautious, and that's completely understandable. So what will be different this time?

Insanity

In my opinion, one of the greatest things to come from this upheaval is investors and traders will have a chance to closely evaluate their portfolios and look at ways to insulate themselves by diversifying.

Clearly, those investors who weren't diversified before the global meltdown will want to change. After all, the definition of insanity is "doing the same thing over again and expecting different results."

This time around, traders need to look at adding risk management to their portfolios in whatever manner may be appropriate, and look at diversifying into other sectors not considered before, such as commodities.

Commodities are foreign to many investors and so this may not be appropriate for everyone, but they're worth considering and discussing with a financial professional. After all, many commodities don't track the stock market.

As someone who has traded commodities most of my adult life, I've always been attracted to them. Unlike shares of stock, I have always found them to be tangible.

Investments you can touch

Short of being an import-export director, or running your own oil well or cattle ranch, the closest you can get to owning commodities is to use futures markets or options. Wheat, corn, crude oil, gold and orange juice all have their basis in the underlying commodity.

Instead of a piece of paper backed by nothing more than a promise from the company that issued it, futures and options contracts almost always are supported by the actual physical commodity. That's comforting to many traders, especially in this current environment.

Getting back to basics is something many Americans are doing right now -- and that includes their investments. Investors are looking for markets familiar to them. After all, we use commodities every day.

Silver lining

The dark clouds of the economy may be parting, but for many investors the big question is what to do now? Every journey begins with a first step.

When looking at adding commodities futures or options to a portfolio, the best first step is to meet with a registered and licensed investment advisor. An advisor can help determine if these investments are appropriate for you and the best course of action.

If trading commodities is appropriate for you, you must decide on which sector to focus. After all, commodities come in all different shapes and sizes, and you can literally trade everything from wheat to silver. Picking a market that interests you is always a good idea, but make sure the commodity you choose offers good liquidity and volume.

Silver is a good example of a highly liquid market that is actively traded using both futures and options. I bring up silver because I think it could perform well as the global economy recovers. There are no guarantees, so it's important to proceed cautiously. But if a global recovery does ensue, silver is well positioned.

Silver shimmers

The economic downturn and the government-sponsored bailouts have made many investors leery of using dollars and driven many people to gold and silver as a hedge against paper currency.

Even China now admits it has doubled gold reserves, and chatter continues to swirl that the nation would like to see a different reserve currency than the dollar. I like silver for this reason but also because of its importance as an industrial metal.

The unique attraction of silver as an investment is underscored by its industrial uses as well as its precious metal allure.

Many, including myself, feel the relentless printing of paper money by the Federal Reserve is the cure that's worse than the disease. While more paper may be a quick fix, the longer-term result will almost certainly be extreme inflation. If that scenario happens, then silver and gold are two of the most common inflation hedges.

In the "new" world of investing, it's important to look for diversified ideas that still offer the potential for good returns. The qualified investor who understands the risk may seriously want to look at commodities, which can offer diversity and a path different from the rest of the herd.

Kevin Kerr is a lifelong commodities trader, having started in 1989 as a member of the New York Cotton Exchange. Mr. Kerr currently is the Editor and Trader for Global Commodities Alert (GCA) at www.kerralert.com

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